What is the outlook for global emerging markets?

Global emerging markets have been under the spotlight in recent months, partly due to their continued outperformance (the MSCI Emerging Market index is up 25.3 per cent year to date) and current geopolitical tensions, but also in light of various milestones that have passed.

This year marks the 20th anniversary of the Asian financial crisis while it has been 70 years since India declared independence from the British Empire. There have been large-scale changes since the 1997 crisis, which was pre-empted by fixed exchange rates and huge levels of debt, most noticeably China’s rise to become the second-largest economy in the world after the US.

But what are the prospects for China’s growth, which sat at a 26-year low of 6.7 per cent last year? With GDP growth of 6.9 per cent in the first half of 2017, will the government’s target of 6.5 per cent be achieved this year, or will the country’s debt problems weigh on growth?

India – touted by some as ‘the new China’ – looks set to benefit from Prime Minister Narendra Modi’s reform. However, the deterioration of diplomatic relations between India and China over a border dispute where India, Bhutan and Tibet meet could escalate into a larger conflict.

Meanwhile tensions between North Korea and the US are showing no signs of abating, with the former recently detonating a hydrogen bomb in a nuclear test and President Trump warning South Korea that “talk of appeasement with North Korea will not work”.

While the current consensus is that a Korean war will be avoided, South Korea’s Kospi index dropped in early August as Trump ramped up the rhetoric and again following the nuclear test before recovering slightly. Over one month it is down 2.2 per cent. Meanwhile safe-haven gold has benefitted; the Pure Gold Company reported that enquiries were up 176 per cent on the weekend of the nuclear test.

John Redwood, global strategist at Charles Stanley

Seventy years on from becoming independent of the UK India is making strides towards a more prosperous future. Under the guidance of Prime Minister Narendra Modi the country has embarked on a bold series of reforms to invest in a more modern infrastructure and to let markets operate better.

The country has accepted the withdrawal of two large denomination bank notes as a kick-start to more people holding money in bank accounts and carrying out electronic taxable transactions. Now the government is putting in a general sales tax to streamline trade between the different states of the Indian union, replacing various transaction taxes operated at state level.

Although India shares are not cheap by world standards, the prospects for growth and for more investors to be attracted to this giant on the move look encouraging for share buyers. The government wants to reform land acquisition, development and labour law, but these are proving more difficult.

South Korea has been hit by worries of conflict in the Korean Peninsula, thanks to the warlike noises of its difficult neighbour. It seems likely we will get by once more without resort to arms. Like much of Asia the Korean economy should be able to grow well from here.

So far this year Asian emerging market shares have done well overall, but they remain good value compared to advanced country markets.

Nick Greenwood, manager of Miton Global Opportunities

Emerging Markets are frequently discussed as though they were a single asset class often reliant on commodity prices. The relentless flows in and out of generic emerging market ETFs by US retail investors do mean that these markets can be quite correlated over short periods of time.

In reality, the outlooks for each market diverge widely. Prospects for equities in India are very different to those in, say, Malaysia and South Africa. One can only speculate rather than invest in Russia, given the history of widespread confiscation every couple of decades.

We generally like Asia, which tends to benefit from a weak dollar, but it has been noticeably weak despite hawkish noises from the Fed. Our greatest conviction lies with India, which looks to have entered a structural bull market under Prime Minister Modi. He is not an evangelist in the Thatcher mould but a supreme administrator intent on making the existing system work more efficiently.

In the medium term, there is a risk that investors cannot see through the hits to earnings per share created by initiatives such as demonetisation and the new goods and services tax. P/E ratios will appear high as companies grapple with the short-term disruption triggered by these new measures. In the longer term, these moves should lay the foundations for a growing economy.

Tim Cockerill, investment director at
Rowan Dartington

China looks sets to continue its current steady growth trajectory and as a one party state change can be initiated more quickly than in many countries.

India is perhaps in a sweet spot now; the new goods and services tax is intended to help business – this and many other reforms are needed to improve the economic environment and there seems to be a willingness to change. Russia though continues to struggle; a higher oil price is helping but sensitivities to it remain far too elevated. Sanctions remain in place and for now its attraction to investors is limited to high risk takers.

South Korea’s less than friendly northern neighbour has always been a concern, but with President Trump displaying ever greater ineptitude on the international political stage, those risks are now at the highest they have been in a long while. Assuming no military action, then Korea’s growth is expected to be modest, and as in all economies continual adjustment and balancing is needed if this is to be maintained.

Emerging markets have sprung back from a long period of weak performance, triggered initially by a recovery in commodity prices – on the whole they offer better value than developed markets, and with better rates of growth expected should in our view be over weighted within portfolios.

John Husselbee, head of multi asset at Liontrust

Looking at Asia, the recent downgrade by Moody’s of China’s debt from Aa3 to A1 is worthy of some attention. However, we felt this downgrade was overdue and fell into the market noise category rather than signalling any kind of major economic shift.

Like most of the rest of the world, China indulged in heavy duty QE in the wake of the financial crisis and this pump priming has helped keep the country’s growth in the 6-7 per cent range while the US struggles along at 2 per cent. Many economists believe China’s continued growth has kept a floor under the global economy while G7 countries struggle, but concerns are growing about the country’s massive debt burden.

Given this background, one key aim for China is to orchestrate deleveraging, and the government has been raising interbank borrowing costs while encouraging more normal costs of corporate finance. If successful, reducing debt is likely to be a multi-year project. We will continue to watch with interest.

No region stands out as screamingly good value at present. We believe the relative value lies in developing regions such as Asia Pacific ex-Japan and global emerging markets. When fears around US protectionism and changing trade agreements under Trump saw both of these regions fall off at the start of the year we took advantage and topped up our holdings. While we are keen to add further to these areas, we will not do so at current inflated prices.

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14th August 20182:45 pm

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